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Can Soft Law Bodies be Effective? Soft Systemic Risk Oversight Bodies and the Special Case of the European Systemic Risk Board

The global response to the financial crisis has included the establishment of new, or significantly revamped, institutions specifically dedicated to the task of overseeing systemic risk. Internationally, the Financial Stability Forum has morphed into the Financial Stability Board (FSB) and has been given a broader mandate. In Europe, a new body, the European Systemic Risk Board (ESRB), has been assigned the role of monitoring and assessing systemic risks. National systemic risk oversight bodies are being set up as well.

Strengthening and reinforcing are words that feature prominently in many policy statements relating to these institutional developments but many of these bodies, including the FSB and the ESRB, are designed to operate without legally-binding powers. This raises questions about how powerful they will actually prove to be. In this article we suggest that lack of formal power need not prevent systemic risk oversight bodies from acting in a credible and authoritative manner. We draw on existing experience of soft laws and institutions in international financial regulation to support this assessment. However, we also acknowledge that softer approaches have been shown to have weaknesses, particularly with respect to surveillance and enforcement. We suggest that the financial crisis has highlighted the limits of what can be achieved through informal methods and the importance of exploring harder alternatives.

We consider what the ESRB in particular can learn from the wealth of accumulated experience at the international level with respect to both strengths and weaknesses of an informal approach. At the same time, we emphasise that there is much about the ESRB’s structure that is special because of its place within the EU constitutional and legal framework and in respect of which lessons drawn from international level experience do not pertain. We explore the implications of the ESRB’s special situation. Close connections to bodies with formal power may enhance the ESRB’s effectiveness. On the other hand, this capacity to have hard effect could also inhibit the ESRB. The net result could be the loss of some of the advantages, such as flexibility and willingness to experiment, that are associated with a softer approach.

An edited version of this article, entitled ‘Can Soft Law Bodies be Effective? The Special Case of the European Systemic Risk Board’, which focuses mainly on the ESRB and European law, is forthcoming in the European Law Review (December 2010).